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Down So Long, It Looks Like Up to the Euro Zone

People outside an employment office in Madrid. The latest unemployment report in Spain was hailed as a good sign.Credit
Daniel Ochoa De Olza/Associated Press

FRANKFURT — This is what passes for good economic news in Europe: Spain just added 265 jobs.

“Clearly encouraging,” the nation’s prime minister, Mariano Rajoy, said of the development.

Never mind that nearly five million people in Spain are out of work. The latest unemployment report from the government, issued on Tuesday, was held up by Mr. Rajoy as a sign that maybe, just maybe, the economy is getting better.

Nearly six years after the financial crisis in the United States spread across the Atlantic, plunging Europe into recession and, in some places, desperate depression, “good” is relative. Economic figures that would be considered disastrous elsewhere are being held up by many politicians and policy makers as really not so bad at all — the first tender shoots of a recovery that is out there somewhere.

Or perhaps not. Politicians everywhere rarely tire of talking up the economy. The question is whether the supposed good news that European leaders are trumpeting is merely convenient cover. The risk — not only to Europe, but to the rest of the world — is that they are simply hoping they have done enough to restore growth, and that the hard decisions some say must still be made can be pushed into the future.

On Thursday, the European Central Bank left interest rates unchanged, defying calls for bolder action. Even so, Mario Draghi, the president of the bank, highlighted the potential “downside risks surrounding the economic outlook for the euro area.”

What few politicians acknowledge publicly is that many of the steps that economists say must still be taken are surefire vote-losers. Liberalizing rigid labor markets, for instance, might spur growth and help young people break into the work force. But it would surely alienate voters who end up losing jobs they thought they had for life.

“Policy makers have a strong interest in the current strategy’s appearing to work,” said Simon Tilford, chief economist at the Center for European Reform in London. “Even the faintest glimmer of hope is interpreted as a sign of recovery.”

Mr. Tilford said Europe was trapped in a Japanese-style malaise. “There’s a surreal debate going on that if we don’t do A, B or C there’s a risk Europe will be like Japan,” he said. “If you look at the data for the last six years, Europe is already worse.”

The danger is that a sense of economic decline has become so ingrained that mediocrity is mistaken for excellence and the status quo marketed as a forward march. Germany, the economic envy of Europe, is expected to grow a mere 0.3 percent this year — a blistering pace only by the new standards of underachievement.

Financially, Europe looks less risky than it did a year ago, when fear was rampant that the euro might fall apart. Bond markets have calmed down. Unemployment is declining, albeit very slowly, in a few countries like Spain and Ireland.

During a visit to Athens last week, the Dutch finance minister said he detected “the first signal of a turn in the economy.” Then, on Wednesday, news arrived from Brussels that the Greek economy was indeed getting better. It shrank by only — only — 5.3 percent in the first three months of the year. That was in fact an improvement: it had contracted 5.7 percent the previous quarter.

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The financial markets, which have bounced back from their lows, don’t fully capture the economic pain many Europeans feel. That is because financial markets ride on hope and look forward, not back. Germany’s benchmark DAX index of stocks, for instance, has risen 39 percent in the last year, even though that nation’s economy, while strong for Europe, is hardly humming along. On Thursday, European stocks were off just modestly, despite the weak outlook from the central bank.

As worries continue about the long-term future of Europe and its currency, the euro, some analysts worry that the good news, such as it is, might be too good. Signs of growth could prompt a sell-off in European bond markets, driving up interest rates at a time when economies are still fragile.

But for many Europeans, that isn’t the big worry. The economy of the euro zone has been shrinking for a year and a half, and the Continent is less wealthy than it was in 2008. Euro area governments are still under pressure to cut spending, even if the budgeteers in Brussels last week granted France, Spain, Portugal and four other countries a little extra time to get their books in order.

The consulting firm Ernst & Young on Wednesday published a survey showing that foreign companies investing in Europe created about 170,000 new jobs in 2012, an 8 percent increase over 2011. But the total value of foreign direct investment to Europe, including Britain and Eastern Europe, plunged by 36 percent to $293.5 billion — double the decline worldwide. Foreign businesses, in other words, remained deeply cautious about investing in Europe’s future.

Even if the euro zone economy does stop declining, that does not mean it will grow. It could simply hit bottom and stay there.

If that happens, there may be few easy options.

German voters remain unwilling to support common euro zone bonds or other large aid programs for troubled countries. And the European Central Bank remains unlikely to begin pumping money into the economy as the United States Federal Reserve and, even more so, the Bank of Japan have done, because of divisions on the central bank’s policy-making Governing Council.

As a result, political leaders have little choice but to continue the laborious, politically risky task of remaking their economies so that they can compete in world markets and create jobs.

“There is still more work to be done,” said Martin van Vliet, senior euro zone economist at ING Bank in Amsterdam. “Countries will have to make new reforms, and those are very unpopular.”

How will we know when the euro zone is really on the mend? The true measure is jobs, Mr. van Vliet said.

When real employment growth resumes in Southern Europe, “then I am willing to declare the worst is behind us,” he said. “Until then I am not so sure.”

A version of this news analysis appears in print on June 7, 2013, on Page B1 of the New York edition with the headline: Down So Long, It Looks Like Up to the Euro Zone. Order Reprints|Today's Paper|Subscribe